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1/ 🧵 Let’s dive into Web3 prediction markets: - how they turn opinions into probabilities on-chain, - why they’re gaining traction, and - where AI could take them next.
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2/ Prediction markets let you wager on future events, buy/sell outcome shares before resolution, and benefit from permissionless, on-chain settlement. Prices ↔ probabilities.
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3/ These markets date back to Wall Street election betting in 1884. On-chain, Polymarket users wagered over $3.3 billion in the 2024 U.S. presidential race alone.
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4/ Most are binary: two outcome tokens (“Yes” vs “No”), each pegged to a fixed payout (e.g. 1 USDC). Before resolution, 🎯 Price(Yes)+Price(No)=1 USDC.
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5/ Dynamic pricing emerges from supply/demand: buying “Yes” pushes its price up (higher implied probability), while “No” falls — and you can trade anytime.
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6/ Order books or AMMs are used for trade execution. Order books (used by Polymarket) are costly to run fully on-chain, so hybrid models - with off-chain matching and on-chain settlement - are now more common.
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7/ In AMM models, creators deposit collateral (e.g. 1 ETH) and mint equal outcome tokens (e.g. 100 Yes + 100 No at 0.01 ETH each). Prices shift with token supply.
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8/ Pricing rules range from simple linear functions to Logarithmic Market Scoring Rules (LMSR), offering smoother discovery as sentiment shifts — all within the fixed payout cap.
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9/ A key challenge is resolving off-chain events. Prediction markets rely on decentralized oracles (e.g. Optimistic Oracle) to report real-world outcomes on-chain.
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10/ Human traders have limited bandwidth and incentives. Niche markets often suffer low liquidity and herd biases, skewing forecasts.
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11/ Imagine AI agents instead: always-on, ingesting news/clinical data, spotting signals, and trading automatically—turning markets into truly real-time forecasting engines.
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12/ The future? Web3 prediction markets + AI agents = scalable, unbiased, 24/7 probability engines for everything from elections to biotech breakthroughs. 🔮✨
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Interested in learning more? Check out this article by @phipsae : https://phipsae.medium.com/building-web3-prediction-markets-how-they-work-and-where-ai-takes-them-next-e87a6b3511e6
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